Comptroller Kevin Lembo announced today that the state is on track to end
Fiscal Year 2018 with a $244.6-million deficit as a deficit mitigation plan
proposed by the governor awaits action by the state legislature.

In a letter to Gov. Dannel P. Malloy, Lembo said that his office is
projecting a slightly higher deficit than the most recent projection last month
by the state Office of Policy and Management (OPM). Lembo’s projection is larger
due to an anticipated $26.4-million deficiency in the state’s adjudicated claims
account, which is responsible for paying SEBAC v. Rowland settlement claims and
related attorney’s fees, as well as other negotiated and often unpredictable
settlements.

Lembo said the General Fund deficit projection has grown over last month, in
large part, due to reduced revenue available in the General Fund. The state
experienced a recent surge in estimated income tax revenue due to early payments
related to federal tax law changes and a one-time repatriation of hedge fund
profits at the end of 2017. These windfall amounts will largely be transferred
to the state’s Budget Reserve Fund based on a new revenue volatility provision.
After accounting for that, overall General Fund revenue is down by approximately
$16 million – and savings targets on the spending side may be challenging.

Looking ahead, Lembo said there are some positive economic developments worth
watching.

“Connecticut’s economic recovery continues to lag the nation’s recovery –
however, there are some positive economic indicators, including stock market
performance, as well as state GDP growth and job growth related to manufacturing
and finance,” Lembo said. “These are promising signs – but should be taken with
cautious optimism as one month does not make a trend. It’s also important to
recognize that, while a strong stock market is important, nearly half of
Americans do not participate in the stock market – and economic research
indicates that nearly half of U.S. households report being unprepared for an
emergency expense and nearly a quarter of adults report being unable to pay
current monthly bills.”

The latest economic indicators from federal and state Departments of Labor
and other sources that show:

• Through the first six months of FY 2018, withholding receipts were
nominally up 4.8% from last fiscal year. However, this growth is somewhat
overstated due to revenue accruals related to FY 2017 year-end adjustments.
Accounting for this activity, the FY 2018 year-to-date growth in withholding
collections is closer to 2.9%. This more modest growth rate is more consistent
with the job data that follows.

• Several months of bad news on the job front was reversed as calendar 2017
came to a close. The Connecticut Department of Labor (DOL) reported the
preliminary Connecticut nonfarm job estimates for December from the business
payroll survey administered by the US Bureau of Labor Statistics (BLS). DOL’s
Labor Situation report showed the state gained 6,000 net jobs (0.4%) in December
2017, to a level of 1,685,200, seasonally adjusted. In addition, November’s
originally-released job loss of 3,500 was revised down by the BLS to a loss of
1,800 for the month.

• For the year, DOL reported preliminary data show that Connecticut gained
7,700 jobs on a seasonally-adjusted basis and 6,200 jobs on an annual average
basis. This compared favorably with 2016, which saw annual average growth of
5,000 jobs. However, this level of increase is still lower than the last period
of economic recovery where employment growth averaged over 16,000 annually. DOL
cautioned that the 2017 data is subject to revision by BLS as the result of the
annual benchmark process that will be released in March 2018.
• Connecticut has now recovered 76.4% (91,000 payroll job additions) of the
119,100 seasonally adjusted jobs lost in the Great Recession (3/08-2/10). The
job recovery is into its 94th month and the state needs an additional 28,100
jobs to reach an overall employment expansion.
• Connecticut's unemployment rate remained at 4.6 percent in December, unchanged
from November 2017 and two-tenths of percentage point higher than from a year
ago when it was 4.4 percent. Nationally, the unemployment rate was 4.1% in
December 2017. The chart below shows a comparison of the Connecticut and U.S.
unemployment rates for the past three calendar years.

• DOL reports that December 2017 seasonally adjusted average weekly initial
unemployment claims for first-time filers in Connecticut fell by 652 claimants
(-16.6%) to 3,279 from November 2017, and were lower by 533 claims (14.0%) from
the December 2016 level of 3,812.
• Among the major job sectors listed below, six experienced gains and four
experienced losses in December 2017 versus December 2016 levels. Manufacturing
was the bright spot, adding 4,100 jobs year-over-year. DOL noted that the
strategic manufacturing sector has not seen an employment increase since 2010
and before that in 1997. Sectors with the largest job losses included
Government, Leisure & Hospitality and Construction.

• December 2017 average hourly earnings at $31.00, not seasonally adjusted,
were up $0.34, or 1.1%, from the December 2016 estimate. The resultant average
private sector weekly pay amounted to $1,050.90, up $17.66, or 1.7% higher than
a year ago.
• The 12-month percent change in the Consumer Price Index for All Urban
Consumers (CPI-U, U.S. City Average, not seasonally adjusted) in December 2017
was 2.1%.
• The Bureau of Economic Analysis reported that Connecticut’s personal income
grew by 3% between 2015 and 2016. This ranked Connecticut 33rd nationally in
2016 income growth.
• A December 20th report from the Bureau showed Connecticut personal income
increasing at a quarterly rate of 0.6% between the second and third quarters of
2017. Based on these results, Connecticut ranked 36th nationally in personal
income growth, and below the national average of 0.7% for the quarter. On an
annualized basis, Connecticut’s income growth would be 2.2%, which is just
keeping up with the rate of inflation.
• State Personal Income for the fourth quarter 2017 and preliminary annual 2017
data are schedule to be released on March 22, 2018.

• In its January 7th release, Berkshire Hathaway HomeServices reported
results for the Connecticut housing market for December 2017 compared with
December 2016. Sales of single family homes declined 11.48 percent. However, the
median sale price rose 3.09 percent. New listings in Connecticut decreased by
14.94 percent, but the median list price increased 3.26 percent to $258,150.
Average days on the market increased 8.99 percent in December 2017 compared to
the same month in the previous year (97 days on average, up from 89 days). The
table below contains more detailed data for the Connecticut market.

• The following chart from Berkshire Hathaway HomeServices shows the total
number of Connecticut single family homes for sale in December 2017 distributed
by list price:

Stock Market

• Estimated and final income tax payments typically account for approximately
35 to 40% of total state income tax receipts. Both the estimated and final
payments had a negative rate of growth in both Fiscal Years 2016 and 2017.
• However, due to a combination of one-time events, estimated payment
collections increased substantially in December 2017, more than doubling the
month-over-month total from the prior year. For example, December 2017 estimated
payments totaled $513.8 million versus $251.1 million in December 2016. In
addition, year-to-date combined estimated and final payments were up 39.3
percent through December 2017 compared with the same period in 2016.

• Two primary factors contributed to the significant increase in estimated
payments in December 2017. The first is related to the recent Federal tax change
that placed limits on the amount of state and local taxes (SALT) that can be
deducted for Federal tax purposes. Based on this new provision, many Connecticut
taxpayers made payments prior to the end of calendar 2017 to ensure these
estimated income tax payments would be deductible for their Federal 2017
returns. Therefore, these payments represent a shift from collections that would
likely have occurred in April 2018.
• The second factor was related to an October 2008 Federal law that eliminated a
common mechanism used by hedge fund managers that enabled them to defer receipt
of incentive or management fees earned by charging them to an offshore fund.
Under the new rules (Internal Revenue Code Section 475A) hedge fund managers had
to recognize these profits, earned prior to January 1, 2009, as income before
December 31, 2017. Therefore, a significant amount of the estimated payments
collected were related to hedge fund managers bringing these profits back to the
United States from overseas. As such, they should be considered to be a one-time
revenue source.

• All of the major stock market indices experienced significant gains in
calendar 2017. The Dow added 25.1 percent, having hit 71 closing records over
the course of the year. The S&P gained 19.4 percent, and the NASDAQ rose 28.2
percent in 2017. As of this writing, stocks continue their upward trend through
January 2018.

DOW

NASDAQ

Consumer Spending

• Consumer spending is the main engine of the U.S. economy, accounting for
more than two-thirds of total economic output. The Commerce Department reported
that advance retail sales rose 0.4 percent in December, after a 0.9 percent
growth in November. Sales last month were supported by a 1.2 percent increase in
receipts at gardening and building material stores. Sales at auto dealerships
rose 0.2 percent, while gas station sales remained unchanged from the previous
month.
• Last month, sales at electronics and appliance stores fell 0.2 percent.
Clothing store receipts declined 0.3 percent, but sales at online retailers
jumped 1.2 percent. Receipts at restaurants and bars rose 0.7 percent. Sales at
sporting goods and hobby stores dropped 1.6 percent, the biggest decline since
November 2016.
• For the year, retail sales grew 4.2 percent in 2017, the most in three years.
Non-store retailers (online sales) were up 12.7 percent from December 2016,
while building materials and garden equipment and supplies dealers were up 9.9
percent from last year.

Consumer Debt and Savings Rates

• According to the Federal Reserve Bank of New York, aggregate household debt
balances rose to another new peak in the third quarter of 2017. As of September
30, 2017, overall debt – including mortgages, auto loans and student loans – hit
a record $12.96 trillion. This increase put overall household debt $280 billion
above its peak in the third quarter of 2008, and 16.2 percent above its trough
in the second quarter of 2013. Aggregate household debt balances have now
increased in 13 consecutive quarters.
• The New York Federal Reserve also noted that mortgage balances, the largest
component of household debt, increased again during the third quarter. Mortgage
balances shown on consumer credit reports on September 30 stood at $8.74
trillion, an increase of $52 billion from the second quarter of 2017. Balances
on home equity lines of credit (HELOC) have been slowly declining, dropping $4
billion from the second quarter and now stand at $448 billion. Non-housing
balances, which have been increasing steadily for nearly six years, were up
again in the third quarter, rising $68 billion. Auto loans grew by $23 billion
and credit card balances increased by $24 billion, while student loan balances
saw a $13 billion increase.
• In its January 29th release, the Bureau of Economic Analysis (BEA) reported
the personal-saving rate declined to 2.4 % in December from 2.5% in November.
This level has decreased steadily from a recent peak of 6.3% in October 2015 and
is close to prerecession lows.
• The higher debt levels and lower savings point to U.S. wage gains that are not
keeping up with consumers' needs and desires to spend. This also signals a more
uncertain outlook for future consumer spending gains. One explanation for this
trend is the so-called wealth effect. Consumers may feel richer because the
stock market is rising and home values have increased in recent years.
• The graph below provides a long-term view of the U.S. savings rate from the
beginning of 1959 through December 2017. As can be seen there is a pronounced
downward trend over the period. It should be noted that the U.S. Personal Saving
Rate does not include capital gains from the sale of land or financial assets in
its estimate of personal income. This effectively excludes capital gains – an
important source of income for some.

• Despite the overall improvement in the nation’s economy, income inequality
continues to widen as wage growth remains modest. A number of economists see the
dramatic decline in the personal savings rate as a red flag as consumers borrow
more to fuel spending. This will leave little margin for error in case of a
downturn, especially for families who are living from paycheck to paycheck.
• Two surveys in last year help to illustrate the point. In its May 2017 report
on the Economic Wellbeing of U.S. Households for 2016, the Federal Reserve Board
found despite improvement in recent years, substantial shares of adults struggle
with their regular expenses or would have difficulty coping with an unexpected
hardship:
 Just under one-fourth of adults are not able to pay all of their current
month’s bills in full.
 Forty-four percent of adults say they either could not cover an emergency
expense costing $400, or would cover it by selling something or borrowing money.
 Twenty-three percent of adults had to pay a major unexpected out-of-pocket
medical expense in the prior year, and one-fourth report forgoing one or more
type of health care in the prior year due to affordability.
• In January 2018, Bankrate completed its latest Financial Security Index survey
and found similar results: Only 39 percent of Americans would use savings to
cover an unexpected expense of $1,000. More than a third of respondents would
resort to some type of debt to cover the expense. Almost 1 in 5 would pay with a
credit card and finance the balance over time; 12 percent would borrow from
family or friends; and 5 percent would use a personal loan.

Consumer Confidence

• The U.S. consumer confidence index (CCI), published by the Conference
Board, is an indicator designed to measure consumer confidence. This is defined
as the degree of optimism on the state of the economy that consumers are
expressing through their activities of savings and spending.
• The Conference Board reported that consumers' assessment of current economic
conditions increased in January 2018, following a decline in December. The Index
now stands at 125.4, up from 123.1 in December. The board noted that
expectations improved from the previous month, however consumers are somewhat
ambivalent about their income prospects over the coming months.

Business and Economic Growth

• According to a January 26th release from the Bureau of Economic Analysis, U.S.
Real Gross Domestic Product increased at an annual rate of 2.6 percent in the
fourth quarter of 2017. In the third quarter, real GDP increased 3.2 percent.
For the year, the economy grew at 2.3 percent, up from the 1.5 percent growth
rate experienced in 2016.
• The increase in real GDP in the fourth quarter reflected positive
contributions from personal consumption expenditures (PCE), nonresidential fixed
investment, exports, residential fixed investment, state and local government
spending, and federal government spending that were partly offset by a negative
contribution from private inventory investment. Imports, which subtract from GDP
growth, increased at their fastest quarterly rate in more than seven years.

• Corporate profits rose 4.3 percent between the second and third quarter and
grew 5.3 percent in the third quarter compared to the same period a year ago.
Corporate profit for the fourth quarter and 2017 annual results are scheduled to
be released on March 28, 2018.
• In a January 24th report, the Bureau of Economic Analysis released Real Gross
Domestic Product (GDP) results by state for the third quarter of 2017.
Connecticut experienced a seasonally adjusted annual growth rate of 3.9 percent,
which ranked 8th in the nation overall. This was a significant improvement from
the second quarter of 2017, when Connecticut ranked 44th in the nation with
annualized growth of 1.9 percent. The sectors that contributed most to
Connecticut’s strong third quarter performance were finance and insurance,
durable goods manufacturing, and information services.
• According to a December 22nd report by the U.S. Department of Commerce, new
orders for durable goods in December increased $7.0 billion or 2.9 percent to
$249.4 billion. This increase, up four of the last five months, followed a 1.7
percent November increase.
• Excluding transportation, new orders increased 0.6 percent. Excluding defense,
new orders increased 2.2 percent. Transportation equipment, also up four of the
last five months, led the increase, $6.0 billion or 7.4 percent to $87.2
billion.

• The January 24th Markit Flash Purchasing Manager’s Index (PMI) reported
that January data indicated another solid expansion of U.S. private sector
business activity. Manufacturing production continued to increase at a much
faster pace than service sector activity. The PMI was 53.8 in January, down from
54.1 in December. Any index reading above 50 indicates growth.